Stumbled across a great article last night at www.tcpalm.com about paying household employees legally. The article was authored by an unexpected source -- Fay Vincent, former Major League Baseball Commissioner. Thank you, Mr. Vincent.

Fay Vincent, former corporate CEO and Major League Baseball commissioner, lives in Vero Beach.

Sunday, October 28, 2012

Shortly after I began my first job in the early 1960s as a young lawyer in a New York law firm, a senior partner summoned me and told me he needed a lawyer. With chagrin, he told me a woman housekeeper he employed for about 30 years had recently retired. He showed me a letter he had just received from authorities, asking him to document the Social Security taxes he had paid for her account.

Of course, he had never paid any such taxes, and when she applied for her benefit, federal officials learned of his failure. My assignment, he ruefully explained, was to determine how he should respond to the feds. I quickly did the appropriate research and returned to his office with the news that he owed many thousands in taxes and interest and had no legal basis for refusing to pay.

I never forgot his embarrassment. I also vowed never to make a similar mistake.

I am regularly surprised by the number of successful people who somehow have persuaded themselves Social Security taxes do not have to be paid for household help. My guess is the number of otherwise solid citizens who cheat on this form of taxation is enormously high. I dare you to ask your neighbors, relatives and even adult children how they regard such taxes and you will soon learn the extent of the problem.

The reciprocal of the problem is the number of people — usually women — who have worked for years for those like the senior partner in my old law firm only to discover when they seek to collect their old age pension that there is no earnings record of their employment, so they are out of luck.

Of course, some of these workers have also been cheating on their own taxes by failing to report the cash they have been paid under the table on which neither income nor Social Security tax have been withheld. The number of unfortunate older people who end up with little or no access to the Social Security system has got to be huge, but how can one be certain of the statistics when this underground economy remains submerged?

What bothers me is the obvious hypocrisy on the part of all the good-hearted citizens who would not think of stealing from their household employees. They do not regard themselves as doing anything seriously wrong. To them the household tax is a silly burden with no redeeming benefits.

These people do not stop to think that they are not just cheating the federal government, but their employees as well. The real victims are the very employees or "nannies" entrusted to raise the family children. The real victims are the women — and some men — on whom the family household depends for all the countless tasks central to modern life.

The employers are often the women who manage the household but who find the quarterly tax returns a great nuisance to be disregarded in the press of more important duties. And the risk of getting caught is slim.

There are other risks in not paying these taxes. Remember the two high-ranking women nominated by President Bill Clinton to serve as attorney general who had to withdraw their candidacies after having been found not to have paid taxes for nannies or undocumented household employees? One was even a sitting federal judge; the other was a senior business executive. They paid a price for their disregard of these taxes.

In some part, these Social Security taxes are grounded in turgidly expressed laws and regulations. Many household employers are ignorant of the law; others may have some idea of the tax requirements but rely on the total lack of enforcement mechanism. Some may believe they will pay when they are asked or directed to do so. But no one has explained to them the harm they are causing down the road to the employees they often claim to value highly.

Politicians are lyric in their praise for the benefits of our Social Security system, and properly so. One wonders, however, how many members of Congress would openly submit to confirming their adherence to these household taxes. Here is the new example of a situation best captioned — "don't look and don't tell."

Fay Vincent of Vero Beach is a former corporate CEO and commissioner of Major League Baseball.

Next week is the official appreciation week for the unsung heroes of our society -- nannies. If you have a caregiver, make sure she knows how much you appreciate the way she nurtures, teaches, inspires, and protects your loved ones. It doesn't have to be something lavish or expensive -- just make sure she feels the love!

Beyond Nanny Appeciation Week, one of the best things a family can do for their nanny is to make sure she is paid professionally -- so that she has all the protections and benefits that other professionals enjoy (i.e. retirement income through Social Security, retirement medical insurance through Medicare, unemployment benefits, etc.). Handling payroll correctly is not as expensive or as difficult as many people think and goes a long way toward creating a successful employment relationship.

Since we became household employers and started Breedlove & Associates back in 1992, the question of worker classification has come up almost every single day in one form or another -- Is she my employee or an independent contractor? Can't I just give her a Form 1099 at year end? If she agrees to be an independent contractor, is it legal?

Unfortunately, a lot of the answers floating around on parent forums and other websites are flat out wrong -- and lead families into expensive mistakes. We feel like it's our job to share the correct information so families don't get blindsided by legal problems. So, here's what you need to know.

The IRS has a 20-point test to determine worker classification. In virtually all cases, the IRS has ruled that domestic workers (i.e. nannies, housekeepers, senior caregivers, personal assistants, chefs, estate managers, etc.) are employees of the families for whom they work. It doesn't matter what the contract says or what the worker calls herself, the family is legally considered the employer and, therefore, they are subject to household labor laws and the "nanny tax" obligations.

Why does the IRS care? It's all about tax dollars and funding the programs that provide worker benefits and protections. Employers are required to match the employee's Social Security and Medicare taxes as well as pitch in to the state and federal unemployment pools that fund unemployment benefits. Without these contributions, workers find themselves without retirement income, health insurance during retirement or temporary income in the event of a layoff.

For these reasons, the IRS and the Department of Labor have teamed up recently to begin an unprecedented effort to crack down on worker misclassification. It's simply not worth the tax evasion charges -- and corresponding fines, back taxes and interest.

If you have any questions about worker classsification, please don't hesitate to give us a call. We're here to help.

If you pay a domestic worker (i.e. nanny, housekeeper, senior caregiver, etc.) $1,800 or more in a calendar year, you are required to withhold Social Security and Medicare taxes (currently 4.2% and 1.45%, respectively) from your employee's pay. Collectively, these taxes are known as "FICA." Employers who fail to withhold the FICA taxes are responsible for paying them for their employee.

If you're a household employer and you've recently prepared and distributed a Form W-2 to your employee, don't forget that a copy of the W-2 needs to go to the Social Security Administration (SSA) by the end of February. It's the employer's responsibility to file the 2011 W-2 Copy A and W-3 with the SSA on behalf of each employee who was paid $1,700 or more during 2011 (the 2012 threshold is $1,800).

This part of the "nanny tax" paperwork ensures that your employee receives the proper "earnings credits" from the SSA. These credits are used to calculate the amount of benefits she will receive during retirement. Retirement benefits are based on an income replacement formula that factors the worker's highest 35 years of earnings. So, the greater her earnings credits, the more golden her golden years will be.

In 2011, if a family employs a household worker and pays him/her less than $1,700 in the calendar year, the family is not obligated to withhold FICA taxes (Social Security and Medicare) nor are they required to pay the employer portion of FICA for that individual. It's generally referred to as the "Casual Babysitting Exemption."

In 2012, the threshold will increase to $1,800 in a calendar year.

Please keep in mind that, even though you may be exempt from FICA reporting, you may still be required to file unemployment tax returns if the total paid to all employees combined exceeds $1,000 in a calendar quarter (a few states have thresholds that are even lower).

Finally, whether you have to file or not, you are legally still an employer so make sure you adhere to all local, state and federal labor laws.

A reminder to families who employed a domestic worker in 2010 (i.e. nanny, housekeeper, personal assistant, health aid, elder care companion, etc.) and paid the worker more than $1,700, Form W-2 Copy A & Form W-3 must be filed with the Social Security Administration by February 28.(Note: If you are a Breedlove client, we’ve got you covered).

The 2011 Social Security tax for employees will drop from 6.2% to 4.2%, allowing employees to keep more of their earnings. Please note that this change is only for employees -- the employer's tax rate has not changed. Also, it will only last until the end of 2011, so enjoy it while it lasts!